Income Tax--Current Issues

Practice Update

V.K. Subramani

DILEMMAS ASSOCIATED WITH RECEIPT OF ENHANCED COMPENSATION AND INTEREST ON SUCH ENHANCED COMPENSATION

Practically, we come across taxpayers receiving enhanced compensation and interest thereon consequent to court order. The action of compulsory acquisition might have taken place even 3 decades ago. The subject matter in many of those cases were agricultural land beyond notified municipal areas and some beyond municipal limits but those municipal limits were not notified at that point of time.

If a compulsory acquisition had taken place and the compensation received originally is tax free for the reason that the land compulsorily acquired was not covered by the definition of 'capital asset' in section 2(14), then the enhanced compensation received now, is also not exigible to income-tax. This is notwithstanding the subsequent notification of the municipality or the recent mandate of population linked aerial distance between the municipal limits and location of land.

In reality, the authority who pays the enhanced compensation invariably deduct tax at source by citing section 194LA which came in to the statute book w.e.f. 1-10-2004 even though the compulsory acquisition had taken place much before that date. This put the recipients who otherwise need not file ITR are compelled to file ITR to receive the refund of the amount of tax deducted at source.

Section 10(37) provides exemption in the case of urban agricultural land w.e.f. 1-4-2005 (A.Y. 2005-06). However, this exemption is subject to certain conditions mentioned therein.

As regards interest on enhanced compensation, it is chargeable to tax under the head 'other sources' with ad hoc deduction of 50%. Since the interest amount is chargeable to income-tax deduction of tax at source is justified. The rate of tax deduction is @ 10% under section 194LA which matches with the rate applicable under section 194A.

It would be worth noting that where any compulsory acquisition is made under RFCTLARR Act, 2013 the entire income embedded in the transaction of the recipient assessee would be tax-free.